How does student loan interest accumulate over time?

Student loan interest accumulates through a process called daily compounding or simple daily interest, depending on the loan type. Lenders calculate interest by multiplying your outstanding principal balance by the daily interest rate, which is your annual rate divided by 365. Each day, that interest amount is added to what you owe. For federal loans, unpaid interest can capitalize, meaning it gets added to your principal balance at certain points, such as when you enter repayment after a grace period or exit a deferment. Once interest capitalizes, you start paying interest on a larger principal, which accelerates how quickly your debt grows. This is why borrowers who make only minimum payments or pause payments can see their balances grow significantly over time.